Fishing lure in water

Nothing lasts for ever… including deferment

Sometimes it’s possible to apply to HMRC to defer paying all or part of one’s SDLT liability. FA2003 limits such applications to circumstances where it’s impossible to know for sure what the SDLT liability will be at legal completion. Overage is probably the most common example. Let’s imagine a developer buys a site for £700,000, based on a current (but un-implemented) planning permission to build 14 houses. The canny seller, realising that there might be room on the site for more than 14 dwellings, insists that the contract obliges the developer to pay overage (say, £25,000 per extra dwelling) if planning permission for more than 14 houses is granted during the 10 years after the transfer to the developer.

At legal completion, no-one knows either if another planning application will be made or, if one is, what its outcome will be. The overage payment is both contingent, because no-one knows for sure if it will be paid; and uncertain, because no-one knows for how many extra houses might be involved. The developer applies for (and gets) permission from HMRC to defer payment of SDLT on the overage element of the price, but must pay SDLT on the £700,000 paid on completion. SDLT on that cannot be deferred.

Deferment applications to HMRC must include an estimate of: (a) when the outcome will become certain and/or un-contingent and (b) the amount of money that will be involved. The SDLT return filed following legal completion will indicate whether or not a deferment application has been made (or will be made) in relation to the transaction in question.

Once the decisive event happens and what was contingent and/or uncertain becomes un-contingent and certain, a 30 day filing period starts to run. Those who made deferment applications must file another SDLT return (by letter) and pay any further SDLT due within that 30 day period. It’s all too easy for purchasers to forget these obligations.

However HMRC’s computer has a very long memory and HMRC has for some time been sending out “fishing” enquiry letters to purchasers to whom permission to defer was granted, asking what has happened about the deferred part of the purchase price. HMRC is thought to regard the SDLT collected this way as “low-hanging fruit”; because it collects not only the outstanding SDLT but also, in many cases, substantial penalties (for late filing) and interest payments (on overdue SDLT) from the SDLT payers who have forgotten to tie up these lose ends within the 30 day period allowed.

Anecdotal evidence now suggests that HMRC is getting more rigorous about this. A new variety of “fishing” enquiry is emerging. HMRC has begun to write to SDLT payers asking what administrative systems they have put in place to ensure that deferred SDLT liabilities are paid on time and not forgotten. In the main, recipients of these enquiries appear to be those whose tax affairs are sufficiently large and complex to warrant having an HMRC Corporate Relationship Manager. But given the amount of tax at stake, it makes sense for smaller firms and for individuals to think about their property purchases that involved SDLT deferment applications and review what – if anything -should be done and when. Unprompted disclosure of missed tax liabilities is penalised less heavily than disclosures prompted by an HMRC enquiry; so there is a financial incentive to get this one right before HMRC starts the ball rolling.

One interesting point is that most (if not all) such “fishing” enquiries have no statutory basis. In other words, there is usually no legal sanction for refusing to respond. However before adopting a policy of non-cooperation, SDLT payers might want to consider what sort of signal that sends to HMRC. Moreover although these enquiries usually relate primarily to possible SDLT liabilities, other tax liabilities may also be involved, including VAT and Capital Gains Tax.

Purchasers who made successful deferment applications also need to remember that the trigger event starting the 30 day period is often something other than the payment of money. SDLT deferment only lasts for as long as the outcome is contingent or uncertain. Once the liability becomes absolute (i.e. not dependent of some future event) and quantifiable, the 30 day period starts to run, even if the due date for any payment to the vendor is still some way in the future.

Finally, what happens if, in our example, no-one applies for permission to build more than 14 houses? At the end of the 10 years, the developer’s overage liability comes to an end. But from an SDLT perspective, that’s not the end of the matter. The developer must still file another SDLT return (by letter) telling HMRC that the final outcome was such that no further SDLT became due. The penalty for failing to file an SDLT return on time also applies to failure to file a “nil” return, even though no tax is due.